Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County. Haley Fromholz, Judge. Affirmed. Los Angeles County Super. Ct. No. BC329890
Fischbach and Fischbach and Joseph S. Fischbach for Plaintiffs and Appellants.
Frank A. Weiser for Defendants and Respondents.
COOPER, P. J.
After winning a jury verdict and entering a stipulated settlement in a state court lawsuit, appellants Dhansukhbhai Patel and Padmaben Patel (the Patels) were stymied in their efforts to collect as a result of a federal bankruptcy court stay. Once the stay was lifted, full payment was made in accordance with the terms of the settlement agreement (an issue already litigated and decided in a prior proceeding).
Frustrated by the delay in receiving payment, appellants filed a complaint asserting a cause of action for fraudulent conveyance based on transfers of property that allegedly occurred prior to the bankruptcy petition and allegedly caused the bankruptcy petition to be fraudulent. The trial court sustained respondents’ demurrer and dismissed the complaint.
We affirm. Because appellants were paid in full, they are not creditors, a prerequisite to a cause of action for fraudulent conveyance. Although appellants were creditors of at least one respondent while the federal bankruptcy proceeding was pending, appellants cannot collaterally attack in a state court proceeding whether the bankruptcy petition was brought in good faith, the gravamen of their cause of action for fraudulent conveyance.
FACTUAL AND PROCEDURAL BACKGROUND
1. The First Action–Patels Sue For Fraud and Breach of Fiduciary Duty
On April 3, 2003, in state court case No. LC064552, appellants sued Olin Ghosh and Anosuya Ghosh for breach of fiduciary duty, conversion, breach of contract, intentional interference with prospective economic advantage, and trespass. The allegations arose out of the sale of a motel from the Patels to Olin, for which Anosuya acted as a real estate agent. The Patels prevailed and, in addition to liability, the jury also concluded Anosuya committed fraud with respect to the breach of fiduciary duty claim.
The parties stipulated to a settlement. The court’s August 26, 2004 order reflects the following settlement terms: the parties agreed “to settling the matter for the total sum, for actual and compensatory damages, of $250,000.00, with a stipulated judgment for punitive and exemplary damages of $250,000.00, with the jury’s special findings after the trial to be incorporated therein as a stipulated finding of willful misconduct and fraud. [¶] The judgment may be satisfied by receipt of the total sum of $165,000.00, payable $10,000 on Monday, June 7, 2004, $25,000.00 on August 7, 2004, $32,500.00 on November 7, 2004, $32,500 on February 7, 2005, $32,500.00 on or before May 7, 2005, and $32,500.00 on or before August 7, 2005.”
2. The Second Action–Anosuya and Olin Petition for Bankruptcy Protection
On November 5, 2004, Anosuya petitioned for Chapter 13 Bankruptcy. The estimated assets identified in the petition was $0 to $50,000. Apparently the petition was voluntarily dismissed. Olin also petitioned for bankruptcy and also voluntarily dismissed his petition. In their briefs on appeal, appellants state that they were forced to vigorously litigate to protect their interest from case No. LC064552, while the bankruptcy proceeding was pending.
The voluntary dismissals included in the record on appeal are not signed by the court. However, the trial court previously found that the bankruptcy petitions were voluntarily dismissed on January 3, 2006 and January 12, 2006.
3. The Third Action–Olin and Anosuya Sue for Violation of Civil Rights
On February 25, 2005, in federal district court Olin and Anosuya sued the Patels and the state court judge who presided over case No. LC064552 for violation of federal civil rights. The Ghoshes alleged that they were wrongly accused and that the Patels wrongfully commenced case No. LC064552. Apparently, the lawsuit was voluntarily dismissed, but no file stamped copy of the dismissal was included in the record on appeal.
4. The First Action Revisited
The Patels moved to vacate dismissal and enter judgment pursuant to Code of Civil Procedure section 664.6 in case No. LC064552. The court concluded the stipulated judgment was paid in full and all interest was paid. That finding was not appealed.
5. The Current Litigation–the Patels Sue for Fraudulent Conveyance
On March 7, 2005, the Patels sued for fraudulent conveyance Anosuya and Sumit Ghosh, Anosuya’s husband or ex-husband. The Patels alleged that in July 2003, with knowledge of the Patels’ claim against them with respect to the sale of the motel, Anosuya transferred one property to Sumit and one to Olin, which was subsequently sold to Sumit. The Patels are informed and believe that the transfers were made with an actual intent to hinder, delay, or defraud them “in the collection of their claim [in case No. LC064552].” These transfers have “proximately caused damages to Plaintiffs in the full amount of the judgment, since Anosuya Ghosh and Olin Ghosh have voluntarily dismissed their Chapter 13 bankruptcy which was a fraudulent effort to avoid their obligations, together with interest and attorneys fees according to proof.”
On July 7, 2006, the trial court dismissed the action after sustaining Anosuya and Sumit’s demurrers to the complaint. Notice of entry of judgment was served July 11, 2006. The notice of appeal was filed September 11, 2006. The appeal was from “the Judgment granting Defendants Sumit Ghosh, Anosuya Ghosh, and Olin Ghosh’s Demurrers to the First Amended Complaint without Leave to Amend which was heard on June 7, 2006 dismissing the action.” The appeal, which was filed 62 days after notice of entry, was timely because the 60th day fell on a Saturday. Appellants had until the following Monday to file the notice. (Code Civ. Proc., § 12a; Cal. Rules of Court, rule 8.104(a)(2).)
Sumit filed a notice of appeal on September 7, 2006, from “the collateral order denying his attorneys fees upon expungement of the lis pendens filed by the plaintiffs . . . .” That appeal was dismissed under California Rules of Court, rule 8.220(a)(1) because Sumit failed to file an opening brief.
DISCUSSION
1. Standard of Review
“On appeal from a judgment of dismissal entered after a demurrer has been sustained without leave to amend, unless failure to grant leave to amend was an abuse of discretion, the appellate court must affirm the judgment if it is correct on any theory. [Citations.] If there is a reasonable possibility that the defect in a complaint can be cured by amendment, it is an abuse of discretion to sustain a demurrer without leave to amend. [Citation.] The burden is on the plaintiff, however, to demonstrate the manner in which the complaint might be amended. [Citation.]” (Hendy v. Losse (1991) 54 Cal.3d 723, 742.) We review the validity of the ruling, not the reasons given. (Dudley v. Department of Transportation (2001) 90 Cal.App.4th 255, 260-261.)
2. Because Case No. LC064552 Has Been Paid In Full, Appellants Are Not Creditors
Civil Code section 3439.04 provides in part:
“(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: [¶] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor. [¶] (2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either: [¶] (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. [¶] (B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.”
“ ‘Claim’ means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” (Civ. Code, § 3439.01, subd. (b).) “ ‘Creditor’ means a person who has a claim . . . .” (Id. subd. (c).)
In case No. LC064552, the court concluded the stipulated judgment had been paid in full. That ruling was not appealed and is final. Because the stipulated judgment has been paid in full, appellants have no right to further payment. Because they have no right to payment, they are not creditors as that term is used for purposes of fraudulent conveyance regardless of the identity of the debtor (i.e., whether it is Anosuya, Olin, or Sumit). Even if appellants could successfully rescind the transfer of property, there is no monetary debt owing from Anosuya, Olin, or Sumit. Appellants cannot assert a cause of action for fraudulent conveyance based on the settlement proceeds from case No. LC064552 because no funds are owed to them.
Appellants are simply incorrect in statements throughout their brief that they were not paid in full. For example, they state there was only a “conditional” tender of the disputed amount. The amount was “not necessarily in full satisfaction of the underlying debt, and contains conditional language . . . .” The trial court in case No. LC064552 found that the stipulated judgment had been paid in full.
Appellants’ arguments that multiple indicia of fraud can be shown with respect to the transfer of the properties are irrelevant where appellants are not creditors. Because it has been conclusively determined that Anosuya and Olin paid their obligations from case No. LC064552, this case is distinguishable from Satten v. Webb (2002) 99 Cal.App.4th 365, where the court allowed a complaint for malicious prosecution based on state court litigation to proceed after a bankruptcy petition. Because the judgment has been paid in full, this case also differs from cases in other states where plaintiffs have been allowed to proceed on fraudulent conveyance causes of action following a discharge in bankruptcy. (See, e.g., Clark v. Bank of Bentonville (Ark. 1992) 824 S.W.2d 358, 361 [creditor/bank could pursue fraudulent conveyance action after bankruptcy discharge]; Roberson v. Johnson (Ala.Civ.App 2006) 950 So.2d 317, 321 [creditor could pursue fraudulent conveyance action after bankruptcy discharge against transferee].)
3. Appellants Cannot Collaterally Attack the Bankruptcy Proceeding in This State Court Action for Fraudulent Conveyance
Even though appellants were paid in full, their actual receipt of payment was delayed as a result of the automatic stay triggered by Anosuya and Olin’s bankruptcy petitions. (Tidewater Finance Co. v. Williams (4th Cir. 2007) 498 F.3d 249, 252 [filing Chapter 13 Bankruptcy triggers automatic stay].) Appellants believe that they are entitled to the damages they incurred in protecting their claim in the bankruptcy proceeding in federal court. Specifically, appellants state that they “were forced to vigorously litigate the bankruptcy cases and incurred unnecessary legal fees and costs.” Appellants believe they “are entitled to have the fraudulent transfers undone so that they can recover present damages from two years of being injured by Defendants prolonged attempts to escape payment of judgment.” In the trial court, appellants argued that the transfer was accomplished so that Anosuya could file a “fake [Chapter] 13 [bankruptcy]” and that Anosuya and Olin “fraudulently filed bankruptcy” and “put all assets beyond our grasp and declared bogus bankruptcy so we couldn’t collect. That’s a statutory violation . . . .” Appellants emphasize that the fraud was “the transfer of a million dollar home out of Respondent [Anosuya’s] name so that she could file a Chapter 13 Bankruptcy petition and claim to be penniless and without assets.”
Neither party discussed whether a “fraudulent” bankruptcy is preempted by federal bankruptcy law. Therefore, we requested supplemental briefs from the parties. As we shall explain, we conclude the issue of whether the bankruptcy was fraudulent, which is the same question as whether it was filed in good faith, was within the exclusive province of the federal bankruptcy court.
A. Relevant Law
“The pre-emption doctrine, which has its roots in the Supremacy Clause, U.S. Const., Art. VI, cl. 2, requires us to examine congressional intent. Pre-emption may be either express or implied, and ‘is compelled whether Congress’ command is explicitly stated in the statute’s language or implicitly contained in its structure and purpose.’ [Citation.] Absent explicit pre-emptive language, Congress’ intent to supersede state law altogether may be inferred because ‘[t]he scheme of federal regulation may be so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,’ because ‘the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,’ or because ‘the object sought to be obtained by the federal law and the character of the obligations imposed by it may reveal the same purpose.’ ” (Fidelity Federal Sav. & Loan Assn. v. De La Cuesta (1982) 458 U.S. 141, 152-153.)
California cases have repeatedly and uniformly held that state court remedies are not available for prosecuting or defending a bankruptcy action. In Gene R. Smith Corp. v. Terry’s Tractor, Inc. (1989) 209 Cal.App.3d 951 (Smith), the court affirmed the dismissal of a complaint for abuse of process and malicious prosecution based on the alleged wrongful prosecution of an involuntary bankruptcy. The state court worried about “[d]ifferent standards defining identical conduct” where the bankruptcy court decides “bad faith” and the state court would be called upon to decide malicious prosecution. (Id. at p. 955.)
The Smith court relied on Gonzalez v. Parks (9th Cir. 1987) 830 F.2d 1033, 1035-1036, a federal case, which explained: “ ‘That Congress’ grant to the federal courts of exclusive jurisdiction over bankruptcy petitions precludes collateral attacks on such petitions in state courts is supported by the fact that remedies have been made available in the federal courts to creditors who believe that a filing is frivolous. Debtors filing bankruptcy petitions are subject to a requirement of good faith, [citation] and violations of that requirement can result in the imposition of sanctions. . . . Congress’ authorization of certain sanctions for the filing of frivolous bankruptcy petitions should be read as an implicit rejection of other penalties, including the kind of substantial damage awards that might be available in state court tort suits. Even the mere possibility of being sued in tort in state court could in some instances deter persons from exercising their rights in bankruptcy. In any event, it is for Congress and the federal courts, not the state courts, to decide what incentive and penalties are appropriate for use in connection with the bankruptcy process and when those incentives or penalties shall be utilized.’ ” (Smith, supra,209 Cal.App.3d at p. 954, emphasis deleted.)
The Third Circuit allowed a federal lawsuit alleging tortious action arising out of a bankruptcy petition. (Paradise Hotel Corp. v. Bank of Nova Scotia (3d Cir. 1988) 842 F.2d 47, 52.)
This same policy was applied in Idell v. Goodman (1990) 224 Cal.App.3d 262, where the state court action for malicious prosecution followed the bankruptcy court’s rejection of a creditor’s claim. (Id. at p. 266.) The state court found the proceeding to be preempted. “The existence of federal sanctions for the filing of frivolous and malicious bankruptcy pleadings must be read as an implicit rejection of state court remedies. The mere possibility of being sued in tort in state court, with the potential for substantial damage awards, could deter persons from exercising their rights in bankruptcy. Thus, it is for Congress and the federal courts, not state courts, to decide what incentives and penalties shall be utilized in the bankruptcy process.” (Id. at p. 271.)
To the same effect is Pauletto v. Reliance Ins. Co. (1998) 64 Cal.App.4th 597. The complaint for malicious prosecution and abuse of process was based on defendant’s challenge in bankruptcy court to the dischargability of the debt. (Id. at p. 599.) Based on preemption principles, the court concluded that “[a] party aggrieved by bad faith and malicious filings in bankruptcy court is limited to the remedies provided by the Federal Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.” (Id. at p. 606.)
The same principles were applied in Saks v. Parilla, Hubbard & Militzok (1998) 67 Cal.App.4th 565, which questioned whether an adversary proceeding in bankruptcy court was initiated for an improper purpose. The state court found that “[p]arties may not avail themselves of state court tort remedies to circumvent federal remedies for their opponents’ alleged misuse of the bankruptcy process.” (Id. at p. 573-574.) It further concluded that the state court action was preempted by the Bankruptcy code. (Ibid.) The appellate court in Ross v. Universal Studios Credit Union (2002) 95 Cal.App.4th 537, similarly affirmed the trial court’s sustaining of a demurrer where the underlying complaint for malicious prosecution and abuse of process was based on a challenge made in bankruptcy court. This time, with the plethora of authority, the court found “simply no doubt that” the state court claims were preempted. (Id. at p. 541.)
Once again, in Choy v. Redland Ins. Co. (2002) 103 Cal.App.4th 789, the plaintiff argued that he should have been entitled to pursue causes of action for abuse of process and intentional infliction of emotional distress where the defendant was not the debtor but the debtor’s insurer and attorney, what he characterized as a nonbankruptcy party. The court rejected the argument, because the adjudication of the state claim depended on the adjudication of whether the bankruptcy petition was filed in “good faith” within the meaning of the Bankruptcy code. (Id. at p. 801.) “[N]o authorized proceeding in bankruptcy can be questioned in a state court or used as the basis for the assertion of a tort claim in state court against any defendant.” (Ibid.) The plaintiff “cannot use state court tort remedies to circumvent well established federal rules relating to redress for the misuse of the bankruptcy process.” (Id. at p. 802.)
In MSR Exploration, Ltd. v. Meridian Oil, Inc. (9th Cir. 1996) 74 F.3d 910, the bankruptcy court sustained a debtor’s objection to a creditor’s claim and the debtor brought a malicious prosecution action. “Congress has expressed its intent that bankruptcy matters be handled in a federal forum by placing bankruptcy jurisdiction exclusively in the district courts as an initial matter.” (Id. at p. 913.) “[A] mere browse through the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code . . . demonstrates Congress’s intent to create a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike.” (Id. at p. 914.) Allowing malicious prosecution lawsuits to proceed on debtor’s petitions and “innumerable other proceedings” would interject state courts in “the whole complex, reticulated bankruptcy process itself.” (Ibid.)
B. Application
The cases we have summarized generally involve claims of malicious prosecution or abuse of process, but the principles expressed in them are equally applicable to this case where the gravamen of the Patels’ complaint is that the bankruptcy proceeding was fraudulent. In light of the prior ruling in the state court action, the only damages claimed arise out of the Ghoshes’ petition filed and pursued in bankruptcy court. Because the damages are entirely predicated on the claimed wrongful filing of a bankruptcy petition and necessarily relate to the management of the bankruptcy process, they are preempted by federal law, as exclusive jurisdiction belongs in the bankruptcy court.
A Chapter 13 bankruptcy petition must be filed in good faith. (In re Smith (7th Cir. 2002) 286 F.3d 461, 465.) The “requirement of good faith prevents abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefitting them in any way or to achieve reprehensible purposes.” (Matter of Little Creek Development Co. (5th Cir. 1986) 779 F.2d 1068, 1071.) It appears appellants challenged Anosuya and Olin’s conduct in the bankruptcy court. The docket sheet in Anosuya’s bankruptcy indicates that the Patels requested the court set an order to show cause regarding sanctions for bad faith filing and filed a motion to dismiss and deem asset part of the estate in addition to numerous other filings, none of which are included in the record in this appeal. An order issued by the Honorable Arthur Greenwald, United States Bankruptcy judge, discusses the Patels’ argument that Anosuya concealed assets. A similar order by Judge Maureen A. Tighe rejected the Patels’ argument that Olin concealed assets. The Patels asserted that they were “mired in bankruptcy court in countless efforts to protect their right to payment.”
Even if appellants failed to make this challenge in the bankruptcy court, they cannot challenge whether the bankruptcy proceeding was brought in good faith in a subsequent state court proceeding. Remedies that are available exclusively in federal court do not ripen into a state court claim because no federal action is taken. Any other rule would jeopardize the policies established by the bankruptcy court as explained in the cases cited previously. Accordingly, the trial court correctly dismissed the complaint.
4. Lis Pendens
Appellant’s entire argument on appeal with respect to a motion to expunge a lis pendens is as follows:
“Appellants note that this Court denied Appellant’s Writ following the Motion to Expunge Lis Pendens. (Case No. B190610.) That ruling was not on the merits and for the reasons noted above, Appellants submit that it was an abuse of discretion to grant the Motion to Expunge the Lis Pendens and request is respectfully made that this Court reconsider that ruling and instruct the Trial Court to reverse the Order Expunging the Lis Pendens.”
The notice of appeal indicates the appeal is from the judgment sustaining the demurrer to the first amended complaint. This does not include the order denying the motion to expunge the lis pendens. Although we are required to liberally construe a notice of appeal (Cal. Rules of Court, rule 8.100(a)(2)), no reasonable construction of the notice could include the order denying the motion to expunge the lis pendens. In any event, the order is not appealable. (Code Civ. Proc., § 405.39.) Therefore we need not decide whether the appeal was timely, whether the argument is sufficient to preserve the issue, or whether it is meritorious.
DISPOSITION
The judgment is affirmed. Respondents are entitled to costs on appeal.
We concur: RUBIN, J., EGERTON, J.
Judge of the Superior Court of Los Angeles County, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.